UK Economy - The UK's Productivity Problem

It is well known that the UK economy suffers from slow-growing labour productivity. There is a substantial productivity gap with a number of other leading countries. This means that the UK produces less output per hour worked than other countries. The gap is particularly large with the United States and Germany – two of the biggest economies in the world. This revision video looks at some of the causes of the UK's productivity gap and discusses the policies that have or might be introduced to address the issue.

Reasons for the large UK productivity gap

Low investment in research and development: The UK spends less on R&D than many other countries, such as Germany and South Korea. In 2019, the UK spent 1.7% of its GDP on R&D, compared to 2.9% in Germany and 4.6% in South Korea.

Poor management practices: A 2018 report by the Productivity Institute found that the UK has a higher proportion of low-skilled managers than other European countries. This can lead to a lack of innovation and poor decision-making, which can impact productivity.

Low levels of investment in infrastructure: According to the World Economic Forum's Competitiveness Report 2021, the UK ranks 36th in terms of infrastructure quality, behind countries such as France, Germany, and Japan. Total investment is only 18% of UK GDP

Skills shortages and skills gaps: There is an important link between the performance of the labour market and changes in actual & relative productivity in the UK economy. The UK has a relatively low proportion of highly skilled workers compared to other countries. According to the OECD, in 2019, only 42% of the UK's adult population had completed tertiary education, compared to an average of 45% across the OECD. There are skills shortages in specific sectors such as engineering and digital technologies. A report by Engineering UK found that there is an annual shortfall of 20,000 engineering graduates and technicians in the UK

Policies to help overcome the productivity gap

Apprenticeship Levy (2017): This requires employers with an annual payroll of more than £3 million to invest in apprenticeships. The aim is to increase the number of apprenticeships available and improve the skills of the UK workforce.

Skilled Worker Visa Programme (2022): This is designed to deal with skilled labour shortages in specified industries and occupations. Points-based system awarded for things like salary, qualifications and English language skills.

Super-deduction investment scheme (2021): This is a tax incentive that allows businesses to deduct 130% of the cost of new plant and machinery from their taxable profits – designed to encourage businesses to invest in new equipment.